Business context and reporting period
Hamilton Lane Incorporated (HLNE) filed this unaudited Form 10-Q for the quarter ended September 30, 2020, its fiscal second quarter, and the six months then ended. The company provides private-markets investment management and advisory services. At September 30, fee-earning AUM was $39.2 billion, reported AUM was approximately $73 billion, and AUA was approximately $474 billion.
Unless otherwise noted, financial amounts below are in millions of dollars. Comparisons are with the same periods in 2019.
Financial results and liquidity
| Metric | Three months ended Sept. 30, 2020 | Three months ended Sept. 30, 2019 | Six months ended Sept. 30, 2020 | Six months ended Sept. 30, 2019 |
|---|---|---|---|---|
| Total revenue | $84.4 | $64.3 | $154.2 | $129.0 |
| Management and advisory fees | $66.4 | $59.2 | $133.6 | $119.7 |
| Incentive fees | $18.1 | $5.1 | $20.5 | $9.2 |
| Total expenses | $46.1 | $37.4 | $87.0 | $75.1 |
| Consolidated net income | $44.6 | $32.3 | $49.6 | $59.7 |
| Net income attributable to Hamilton Lane Inc. | $21.8 | $15.3 | $25.1 | $26.7 |
| Diluted Class A EPS | $0.66 | $0.56 | $0.79 | $0.98 |
| Fee Related Earnings (non-GAAP) | $28.5 | $24.2 | $56.0 | $49.0 |
| Adjusted EBITDA (non-GAAP) | $40.5 | $29.6 | $72.1 | $59.3 |
Quarterly revenue increased 31%, while parent-attributable net income increased 43%. Total expenses rose 23%; expenses were about 55% of revenue, versus 58% a year earlier. For the six-month period, revenue rose 20%, but parent-attributable net income fell 6%; diluted EPS declined to $0.79 from $0.98. Non-GAAP measures are company-defined and should be considered alongside GAAP results.
Quarterly revenue growth reflected higher management fees and a $13.0 million increase in incentive fees, primarily from one specialized fund. Management and advisory fees increased 12% for both the quarter and six-month period. Compensation and benefits increased 48% in the quarter and 37% for six months, largely due to higher base compensation and bonus accruals. General and administrative expenses declined, including lower travel and professional fees.
Equity in income of investees was $18.0 million for the quarter, compared with $3.7 million a year earlier, reflecting a recovery in public and private market valuations. For the six months, it was a loss of $3.2 million, versus income of $9.9 million, as valuations had not fully recovered from the COVID-19 downturn.
For the six months, operating cash flow was $89.6 million, compared with $66.2 million; investing cash outflow was $17.4 million, compared with $10.8 million; and financing cash outflow was $40.6 million, compared with $31.9 million. Cash, cash equivalents and restricted cash totaled $85.0 million at period-end, including $82.0 million of available cash and $3.0 million of restricted cash. Management reported an additional $125 million available under its Loan Agreements.
Debt was $74.1 million on the balance sheet ($74.5 million principal outstanding). Total assets were $608.1 million and total liabilities were $344.9 million. The tax receivable agreement payable increased to $176.0 million from $99.0 million at March 31, 2020; the increase principally reflects tax benefits associated with share offerings and unit exchanges. Deferred tax assets increased to $220.8 million from $137.9 million.
Material changes and notable items
- Fee-earning AUM increased $0.6 billion over six months to $39.2 billion, with contributions partly offset by distributions and fund-term expirations.
- June and September registered offerings issued approximately 5.1 million new Class A shares in aggregate. The company received approximately $354.6 million in proceeds and used them to settle exchanges of HLA units; these transactions increased HLI’s economic interest in HLA to approximately 64.6% from 55.1% at March 31, 2020. The offerings were not operating cash generation.
- Quarterly dividends declared were $0.313 per share; on November 4, 2020, the company declared a subsequent quarterly dividend of $0.3125 per share, payable January 7, 2021.
- The company amended its multi-draw term loan in September, extending the draw period through September 30, 2021 and setting its rate at 3.5%. The existing term and revolving loans carried rates of 2.25% at quarter-end.
Outlook, risks and contingencies
No quantified earnings or revenue guidance is provided. Management said the precise future impact of COVID-19 could not be predicted. It observed a recovery in markets during the quarter, but warned that the company’s investment valuations and related equity income, AUM/AUA and carried interest may remain volatile. Partnership investment results are recorded on a three-month lag, so later market declines may appear in subsequent reported periods. Management also cited possible fundraising delays, reduced investment activity, volatile incentive fees, and remote-work cybersecurity and operational risks.
Unrecognized carried interest subject to contingencies was $409.7 million, net of amounts attributable to non-controlling interests; it is not recognized as revenue and may not be realized. If received, approximately $102.4 million could be payable to employees and third parties under incentive compensation arrangements. The company’s aggregate unfunded investment commitments were $170.8 million. Management stated that pending or threatened legal matters were not expected to materially affect the financial statements and reported no material changes to previously disclosed risk factors.
A new Philadelphia-area headquarters lease is expected to commence in the quarter ending December 31, 2020; future payments are estimated at approximately $92 million over 17 years. The filing reports no material change in off-balance-sheet arrangements or contractual obligations outside the ordinary course.
Important facts for investors to verify
- Whether the sharp increase in incentive fees is repeatable, given its concentration in one specialized fund and the filing’s warning that such fees are volatile.
- How subsequent market valuations affect equity-method investment results, which are reported with a three-month lag.
- Whether fee-earning AUM growth and new fundraising can offset distributions, fund maturities and any COVID-related fundraising delays.
- The cash demands from investment commitments, dividends, debt service, tax receivable agreement payments and the new headquarters lease, alongside reported liquidity and loan availability.
- The realization and potential compensation costs associated with the $409.7 million of unrecognized carried interest.